Economics

Where Are New-Home Sizes Going?

Much has been made of the death of the McMansion, but new trends are questioning whether that pronouncement was made too early.

As the housing market entered its steep decline during the latter part of the past decade, it took home sizes with it. While there was much to bemoan about the state of the industry, among designers and architects it seemed the one bright spot was what appeared to be the demise of the McMansion and an increased focus on efficient functionality. Between 2007 and 2010, the average size of a new, single-family home in the U.S. fell from 2,504 square feet to 2,381 square feet, according to U.S. Census data. It was the rise of smaller and smarter.

Or was it?

"For all these years, the trend was going [down], and then in 2011 it got reversed," says Rose Quint, assistant vice president of survey research at the National Association of Home Builders. "Everything we had heard from builders, from architects, from consumers … was all pointing to a smaller home. But then in 2011 that all seemed to go under the bus."

Data courtesy of the U.S. Census Bureau

Between 2010 and 2011, average new, single-family home sizes spiked to 2,522 square feet—larger than during the height of the boom, leaving the industry wondering whether smaller homes were ever truly in vogue or if they were simply a necessity due to tight credit, high unemployment, and a lack of equity.

In an effort to find the answer, Builder analyzed data from 12 metro areas around the country—including Boise, Idaho; Boston; Chicago; Denver; Houston; Orlando, Fla.; Philadelphia; Phoenix; Raleigh, N.C.; Salt Lake City; Seattle; and Washington, D.C.—looking at a range of data from home sizes to financing to unemployment and others, between 2005 and 2011. (Most regional data was provided by Hanley Wood Market Intelligence, a division of Hanley Wood, Builder’s parent company.)

Among the 12 MSAs analyzed, all but one saw average home sizes fall over the six-year period, and all saw a decline in price per square foot.

The one metro that bucked the trend for shrinking sizes was Philadelphia, which saw a small uptick in home sizes between the years, moving up 0.61% to an average of 1,829 square feet among all housing types. The market also saw the smallest decline in price per square foot, which dropped only 1.4%. Much of that trend has to do with who is buying the homes, says Greg Lingo, president at Media, Pa.–based Cornell Homes. "We’re generally seeing over the last year that people buying single-family homes are much more qualified in the ability to get a mortgage. It’s truly a move-up buyer."

But even at the other end of the market, Lingo says Philadelphia buyers are turning to attached townhomes in order to get more space at a price they can afford. "It’s not a preference for the long term, but with family changes and economic changes, it’s a better value for the square footage," he says. "Nobody wants a smaller home, necessarily. It’s really what they need. In this economy, people are weighing wants versus needs."

As things get better for the less-expensive end of the market, Lingo expects to see the reverse of the trend he saw going into the downturn. "On the way down, we were delivering the same size house with fewer features and then reducing the size of the home." Now, he says, "we’re seeing people put more custom features in their homes, and I think that will be the first step back. They’ll make the same home nicer, and then start going up."

Orlando saw the largest decline in average new-home sizes, with a drop of 6.7% to 1,836 square feet, and according to custom builder Anthony Lightman of Orlando-based Osprey Custom Homes, "a lot of it has to do with affordability." Osprey specializes in homes that sell for upwards of a million dollars, and four years ago, he says, "I couldn’t do anything for less than two million dollars, but construction loans are so tight that it’s really changing the face of the market." Now, he says, new-home buyers in Orlando are being forced to opt for smaller floor plans or lay out more cash to get loan values down.

Indeed, the average percent financed among new-home sales in the area fell from 81% in 2005 to 73% in 2011. Mortgage financing fell by 88% over the same period, a trend likely related to the metro areas’ unemployment rate, which stood at 9.5 at the end of 2011—the highest of the 13 areas studied, according to the U.S. Bureau of Labor Statistics. During the same six-year period, average price per square foot costs fell by 34.6%.

"I do think there’s still a big market for a big house, but it’s just a problem of getting the loan," Lightman says.

Boise saw the group’s second-largest decline in home sizes, which Lars Hansen, president at Boise-based Brighton Homes, partially attributes to the now-expired home buyer tax credit, which he says incentivized builders to build smaller homes in an attempt to lure tax-credit buyers.

But since the program ended, builders have turned their attention to larger homes, he says, to adapt to the market’s top-down recovery. These days "downsizing [in Boise] is a bit of a myth," he says. "After the tax credit expired, we jumped to things over $300,000. … Some builders are rebranding divisions as move-up, rather than entry-level, buying lots in communities that are somewhat distressed but have larger lots."

However, just as tight credit contributed to the precipitous fall in home sizes during the housing market’s decline, it may once again be lack of credit driving the trend—this time skewing sizes by keeping first-time buyers out of the market. "We see a trend emerging now where lower price points are coming back," Hansen says. People are calling and asking about new construction under $200,000. … I do anticipate that smaller homes and lower price points will become more a part of our mix at the end of the year."

That top-heavy recovery is also what Quint says is behind the national numbers. "The people who were able to buy a home last year had super good credit, super good savings, super good employment—otherwise you would not be able to get a loan. New single-family home starts were 75% lower [in 2011 compared to 2005], so it’s such a tiny market now that this small group of buyers’ preferences are dominating the market."

But like Hansen, she is betting things will adjust as the pool of buyers becomes more diverse. "The moment first-time buyers are able to come back into the market, and both buyers and builders regain access to credit, we expect sizes to ease again," she says. "That’s very odd for those jumps to have taken place in one year."

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